If you argue long enough about economics, you are bound to run into the stagflation argument. The stagflation argument claims that the big state and stimulus caused high inflation, high unemployment, and poor growth during the seventies. Usually this argument is not fully argued by those who believe in it-it is merely asserted, and the rest of us are expected to accept that it is simply the case that the seventies happened that way. Today I'd like to endeavour to illustrate what actually happened in the seventies, what the real causes of stagflation were, and what sort of lessons might be pulled from it.

Italy is often grouped with Greece, Spain, etc. in discussions of the euro crisis. Yet its story is quite different. There were no massive capital inflows; debt is high, but deficits aren't. The most striking thing about Italy is a remarkably dismal productivity performance since the mid to late 1990s. Here's a comparison of Italian with French productivity, as measured by output per worjer, from the Total Economy Database:

I've been reading many attempts to explain what happened; while there's a lot of interesting stuff about everything from regulation to firm size to export mix, I really don't see anything that feels like a slam dunk.

And no, it's not just a too-big welfare state -- France's welfare state is even bigger.

I'm not going to answer this; truly, I don't know. But it's important.

Economics is an agenda-setting system. Here's a working example - Noah Smith engaging Robert Gordon (who is in his turn drinking from the poisoned well of Tyler Cowan). Gordon's big idea is that y'know how things aren't so great? Well, they're always going to be awful, so there's nothing can be done about it! And therefore, we don't need to discuss any action and shut up.

He argues this for the following reasons. One, he thinks technological progress is slowing down. Two, he thinks the US labour force won't grow as fast as it did. Three, educational attainment has "plateaued", based on the OECD PISA comparison. Four, high income inequality means structurally weak demand from the "consumer" (aka labour) sector. Five, globalisation. Six, the environment. Seven, "debt" of whatever sort.

Well, the first of these is an arguable proposition. Personally, I can think of plenty of people who are convinced that technical progress is accelerating, others who think it is slowing down, and still others who think (like David Harvey) that it is illusory or even undesirable. I would argue that both the declinist and Kurzweil-ist views are wrong for the same reason: they are both exercises in cherry-picking the data. Singularitarians love computing and sometimes genetics, because both fields give you an instant optimism hit. Declinists prefer to pick problems that remain unsolved and projects that failed, because that's what their prior assumptions are set to. Both views are dependent on prior value judgments.

But I have a more subtle and useful critique. Economists tend to think technology is exogenous. Historians of technology couldn't disagree more. In their view, technical progress happens through learning-by-doing. This has an important corollary - you learn nothing by being unemployed except that it sucks, and a set of survival strategies that aren't much use except in the context of being on the dole. Technology is, in part, endogenous, and therefore it is influenced by macroeconomic policy.

It's been apparent for quite a while that the core myths of neoliberalism sit on the foundation of a neoliberal/right-wing narrative of what happened in the 1970s.

For many of the people now in power, the period of oil crisis and stagflation was a formative experience regarding economics. For people of my generation - not yet in power, but now adults in our 30s, sort of the middle of the voting populace - the 70s are the times we heard about from our parents and the media, with much neoliberal spin about unions etc.

Two interesting bloggers have brought up the 70s recently and there's lots of food for thought. Both posts are too long to quote in full:

Over at his blog, Interfluidity, Steve Randy Waldman has a really interesting post on Wealth as Insurance which operates in a zero-sum game. He proposes that this propels certain patterns of wealth accumulation and employment.

I think there is a tradeoff between inequality and full employment that becomes exacerbated as technological productivity improves. This is driven by the fact that the marginal benefit humans gain from current consumption declines much more rapidly than the benefit we get from retaining claims against an uncertain future.

Wealth is about insurance much more than it is about consumption. As consumers, our requirements are limited. But the curve balls the universe might throw at us are infinite. If you are very wealthy, there is real value in purchasing yet another apartment in yet another country through yet another hopefully-but-not-certainly-trustworthy native intermediary. There is value in squirreling funds away in yet another undocumented account, and not just from avoiding taxes. Revolutions, expropriations, pogroms, these things do happen. These are real risks. Even putting aside such dramatic events, the greater the level of consumption to which you have grown accustomed, the greater the threat of reversion to the mean, unless you plan and squirrel very carefully. Extreme levels of consumption are either the tip of an iceberg or a transient condition. Most of what it means to be wealthy is having insured yourself well.

An important but sad reason why our requirement for wealth-as-insurance is insatiable is because insurance is often a zero-sum game. Consider a libertarian Titanic, whose insufficient number of lifeboat seats will be auctioned to the highest bidder in the event of a catastrophe. On such a boat, a passenger's material needs might easily be satisfied -- how many fancy meals and full-body spa massages can one endure in a day? But despite that, one could never be "rich enough". Even if one's wealth is millions of times more than would be required to satisfy every material whim for a lifetime of cruising, when the iceberg cometh, you must either be in a top wealth quantile or die a cold, salty death. The marginal consumption value of passenger wealth declines rapidly, but the marginal insurance value of an extra dollar remains high, because it represents a material advantage in a fierce zero-sum competition. It is not enough to be wealthy, you must be much wealthier than most of your shipmates in order to rest easy. Some individuals may achieve a safe lead, but, in aggregate, demand for wealth will remain high even if every passenger is so rich their consumption desires are fully sated forever.

Our lives are much more like this cruise ship than most of us care to admit. No, we don't face the risk of drowning in the North Atlantic. But our habits and expectations are constantly under threat because the prerequisites to satisfying them may at any time become rationed by price. Just living in America you (or at least I) feel this palpably. So many of us are fighting for the right to live the kind of life we always thought was "normal". When there is a drought, the ability to eat what you want becomes rationed by price. If there is drought terrible so terrible that there simply isn't enough for everyone, the right to live at all may be rationed by price, survival of the wealthiest. Whenever there is risk of overall scarcity, of systemic rather than idiosyncratic catastrophe, there is no possibility of positive-sum mutual-gain insurance. There is only a zero-sum competition for the right to be insured. The very rich live on the very same cruise ship as the very poor, and they understandably want to keep their lifeboat tickets.

It is increasingly accepted that these policies are not working in the current environment. But less widespread is the recognition that there is also plenty of historical evidence showing that they have never worked. The same happened during the 1982 developing world debt crisis, the 1994 Mexican crisis, the 1997 Asian crisis, the Brazilian and the Russian crises in 1998, and the Argentinian crisis of 2002. All the crisis-stricken countries were forced (usually by the IMF) to cut spending and run budget surpluses, only to see their economies sink deeper into recession. Going back a bit further, the Great Depression also showed that cutting budget deficits too far and too quickly in the middle of a recession only makes things worse.

As for the need to cut social spending to revive growth, there is no historical evidence to support it either. From 1945 to 1990, per capita income in Europe grew considerably faster than in the US, despite its countries having welfare states on average a third larger than that of the US. Even after 1990, when European growth slowed down, countries like Sweden and Finland, with much larger welfare spending, grew faster than the US.

As for the belief that making life easier for the rich through tax cuts and deregulation is good for investment and growth, we need to remind ourselves that this was tried in many countries after 1980, with very poor results. Compared to the previous three decades of higher taxes and stronger regulation, investment (as a proportion of GDP) and economic growth fell in those countries. Also, the world economy in the 19th century grew much more slowly than in the high-tax, high-regulation era of 1945-80, despite the fact that taxes were much lower (most countries didn't even have income tax) and regulation thinner on the ground.

The argument on hiring and firing is also not grounded in historical evidence. Unemployment rates in the major capitalist economies were between 0% (some years in Switzerland) and 4% from 1945-80, despite increasing labour market regulation. There were more jobless people during the 19th century, when there was effectively no regulation on hiring and firing.

So, if the whole history of capitalism, and not just the experiences of the last few years, shows that the supposed remedies for today's economic crisis are not going to work, what are our political and economic leaders doing? Perhaps they are insane - if we follow Albert Einstein's definition of insanity as "doing the same thing over and over again and expecting different results". But the more likely explanation is that, by pushing these policies against all evidence, our leaders are really telling us that they want to preserve - or even intensify, in areas like welfare policy - the economic system that has served them so well in the past three decades.

For the rest of us, the time has come to choose whether we go along with that agenda or make these leaders change course.

The British government is making urgent preparations to cope with the fallout of a possible Greek exit from the single currency, after the governor of the Bank of England, Sir Mervyn King, warned that Europe was "tearing itself apart".

Reports from Athens that massive sums of money were being spirited out of the country intensified concern in London about the impact of a splintering of the eurozone on a UK economy that is stuck in double-dip recession. One estimate put the cost to the eurozone of Greece making a disorderly exit from the currency at $1tn, 5% of output.

Officials in the United States are also nervously watching the growing crisis: Barack Obama on Wednesday described it as a "headwind" that could threaten the fragile American recovery.

Two reports about the cost of ageing and its fiscal impact came out last week. The IMF's Financial Stability Report concluded that the cost of longevity has been consistently underestimated. By 2050, it says, if people are living for even three years longer than current models predict, it would add 50 percent to the estimated costs of ageing. In short, then, governments and pension funds may have got their sums quite seriously wrong. The IMF calculates that, by 2050, the costs of ageing, including healthcare, welfare spending and pensions, will increase by 5.8 percent of GDP in the advanced economies.

The OECD's report on fiscal consolidation, also out last week, came up with a very similar figure. If current levels of benefits and care are to be maintained, it estimated an increase in age-related spending of 6 percent of GDP by 2050. These figures don't differ that much from the ones I pulled together from various sources last year. The consensus there was around 4 percent of GDP by 2030, so add another twenty years and 6 percent looks like a reasonable guess. It's impossible to predict so far ahead with any accuracy but the general consensus seems to be that ageing populations are going to cost a hell of a lot.

The problem, as both reports point out, is that the economies with the highest percentage of oldies are also the ones with the highest public debt levels. The increased costs of ageing, says the IMF could, by 2050, see the UK's debt rising to 130 percent of GDP, the US and Germany's to 150 percent and Japan's to 300 percent!

Edward Hugh of AFOE submitted an essay for the Wolfson Prize.
You can access the full version here, it ranges far and wide in an attempt to address the question set by the prize, which is about how a country might leave the Euro.

For me the most interesting part was his assessment of "what did Germany gain from the Euro?" This is something I've had some thoughts about, but didn't have time to investigate. To me it's an essential topic in trying to disentangle the claims of "virtue" and "laziness" that have been bandied around in discussion of the Euro crisis.

A number of people have asked me to weigh in on David Brooks's piece today. Sorry, not gonna do a tit-for-tat. Let me instead just make a more general point.

All around, right now, there are people declaring that our best days are behind us, that the economy has suffered a general loss of dynamism, that it's unrealistic to expect a quick return to anything like full employment. There were people saying the same thing in the 1930s! Then came the approach of World War II, which finally induced an adequate-sized fiscal stimulus -- and suddenly there were enough jobs, and all those unneeded and useless workers turned out to be quite productive, thank you.

There is nothing -- nothing -- in what we see suggesting that this current depression is more than a problem of inadequate demand. This could be turned around in months with the right policies. Our problem isn't, ultimately, economic; it's political, brought on by an elite that would rather cling to its prejudices than turn the nation around.

Recently, we've had lots of discussions about Eurozone imbalances, with Migeru pointing out that without investment in the productivity of workers in countries like Spain, the imbalances are destined only to return - no matter what temporary solutions are found in the next few months.

This brought my mind back to an occupation from the boom days, when I (and I think many at ET) could see the world economy heading towards some kind of finance system "iceberg" but we didn't have a good handle on the impacts.

Back then, I was looking at the patterns of migration, inside the UK and inside the reunified Germany - and wondering what it all meant. I still don't know what it "means" in some ways, but the Eurozone experience has added to the picture...

Treatment of ligament/tendon problems - there's a bias towards physiotherapy and against doing operations for these injuries in the UK. It's one of the places where the rationing may be considered to bite in comparison with other countries (esp. in Europe.)

Still, the crucial element of the study is that in lots of tangible ways, the NHS provides a good service - absolutely comparable with other developed countries around the world - and spends less than many of the them. One can question whether the metrics used in the report prove one system is better than another, but it's clear in my opinion that the claims of NHS inferiority aren't backed up by the figures.

This is not the story you'll read in UK government briefing documents, or in many of the press reports. The right wing agenda is to break up the integrated, national service and bring in marketisation and competition. Their claimed basis for this is "improved efficiency" - this report reminds us that it is more about funnelling government expenditure into private companies...

In effect, a shadow banking system has arisen with big banks moving loans off their balance sheets into phony trust companies and thus evading official caps on total lending. Last week, Moody's reported that the Chinese banking system was concealing one-half-trillion dollars in problematic loans, mainly for municipal vanity projects. Another rating service warned that non-performing loans could constitute as much as 30% of bank portfolios.

Real-estate speculation, meanwhile, is vacuuming up domestic savings as urban families, faced with soaring home values, rush to invest in property before they are priced out of the market. (Sound familiar?) According to Business Week, residential housing investment now accounts for 9% of the gross domestic product, up from only 3.4% in 2003.

Letchmi (not her real name), a 40-year-old Singaporean woman, stood in the dock and pleaded guilty to pilfering $743 from the cash register where she worked as a cashier at a local supermarket. She told the judge in mitigation that she stole the money to pay for her medical expenses and that she had a 10-year-old daughter to fend for. She produced medical records to back up her plea. She had returned all the money that she had stolen. Unmoved, the prosecution pushed for a deterrent sentence. The judge imposed a fine of $2,000.

This is a scenario played out repeatedly all over Singapore. The unforgiving high cost of living in the city, coupled with low wages, has led many to commit crimes out of financial desperation. It is, of course, trite to argue that just because one is poor doesn't mean that one is entitled to commit criminal acts. There are many who face economic hardship but don't resort to crime.

I came across this story today and thought it worth recording. There are many more like it and I'll try to record them over time.

The statistics in comparative health studies are imperfect and fuzzy, but as in economics, they point fairly well in a certain direction. I've learned the hard way that those on the right have little interest in interpreting the figures fairly, they prefer to cite anecdotes. One place they often cite as a haven of "private healthcare working properly" is Singapore.

The reality is that it depends very heavily on your income level.

[The linked article moves on to other realities in Singapore - well worth a read.]

As I recall, I was the only contributor who obeyed instructions; everyone else was too concerned about loss of dignity. Anyway, I decided to write the piece around a conceit: that information technology would end up reducing, not increasing, the demand for highly educated workers, because a lot of what highly educated workers do could actually be replaced by sophisticated information processing -- indeed, replaced more easily than a lot of manual labor. Here's the piece: I still think it's a fun read.

So here's the question: is it starting to happen?

Today's Times has an interesting and, if you think about it, fairly scary report about how software is replacing the teams of lawyers who used to do document research. And then there's Watson, of course, who -- which? -- can beat almost everyone except my Congressman at Jeopardy.

...

In my mind this raises several questions. One is whether emphasizing education -- even aside from the fact that the big rise in inequality has taken place among the highly educated -- is, in effect, fighting the last war. Another is how we have a decent society if and when even highly educated workers can't command a middle-class income.